Agribusiness News December 2024 – Sector Focus: The Trump Effect

By Kev Bevan.

On January 20^th, 2025, the new Trump presidency will formally start. For at least the first couple of years Capitol Hill will also be controlled by the Republican party, which should be supportive of the President’s agenda.  Looking ahead, how might a Trump Presidency influence domestic, European and global agriculture?

American domestic policy and regulations

For the most advanced economy in the world, agriculture remains a surprisingly important industry and is highly competitive in most sectors except for sheep.  While productivity growth is generally high, driven by good take up of R&D and a generally light touch regulatory system; federal government support is significant for crop and dairy farmers.

Agricultural policy is normally updated every five years in what is known as the Farm Bill, which is negotiated by both houses of Congress rather than the President.  A stalemate between Democrats and Republicans means that the long overdue new bill will not be set for months yet; perhaps giving the incoming President opportunity to influence it.  Trump is pro farmer so this may be reflected in the eventual bill.  On the other hand, if Robert Kennedy Jr. becomes the new health minister, US agriculture could face less friendly food and farming regulations.

Tariffs is the most beautiful word

The US economy was built on tariffs - not free trade, which worked well up until the 1930’s when the infamous Smoot-Hawley Act sharply lifted tariffs exacerbating the Great Depression.  To drive global economic recovery post WW2, the US supported a multilateral reduction in tariffs, under a series of trade agreements that were agreed under what became the World Trade Organisation (WTO).  China joining the WTO in 2001 was widely considered proof of the benefits of lowering tariffs and globalisation.

A persistent and large US trade deficit has, however, challenged this thinking.  The trade imbalance with China is the main concern as not only has the US lost basic manufacturing sectors to China; the Chinese have also achieved a comparative advantage in key strategic industries like renewables and battery technology through retained use of protective tariffs, non-tariff barriers, subsidies and advantageously weakening its currency.  Trump also has a grudge with the EU, which is partly attributed to protection afforded German manufacturers from an undervalued euro.

A US President can change tariffs quickly by executive order.  Trump has pledged to slap 60% tariffs on Chinese imports and 20% on all other imports when he regains power to improve the US trade balance.  But many trade pundits expect Trump to apply tariffs selectively to get the trading terms he wants.  Nevertheless, a redrawing of global trade patterns may well result.

Pick your side

The good news is that the UK may be less harshly affected.  We are a close ally of the US on security and intelligence matters, which is increasingly important as the world splits between China and the US.  Our trade with China is also very limited compared to that with the US which is our third largest market for food and drink exports.

While Trump is also likely to use tariffs to drive a hard bargain with the Mexicans to reduce illegal immigration; it is how he deals with the EU that could most affect the UK.  As we are no longer part of the EU, it means that we should not be hit with tariffs targeted at German car exports and high value foods like cheese and wine.  Scottish whisky exporters will no doubt be hoping that the UK government remains neutral in any US-EU trade spat.

Of course, China and other countries may well retaliate with their own tariffs.  The direct impact of Chinese retaliation on the UK should be small given our limited trading relationship.  But if Australia and New Zealand, both big meat exporters to China, are “encouraged” to align with the US, more antipodean beef and lamb could be exported to the UK.  This could trigger protests from Irish and French farmers, if this displaces UK meat into the EU market.

Brazil could also be forced to join the Chinese trading sphere given its already deep trade links.  Indeed, the impact of Trump’s trade spat with China in his first four-year term, has resulted in China now importing far more Brazilian than American soya.

Impact of a strong dollar

Exchange rates would also be expected to reflect a tariff war and domestic US economic policy possibly stoking inflation.  With many global commodities, including inputs like fertiliser, set in US dollars, a strong dollar could create problems.

To end on a hopeful note, Trump’s nomination of Scott Bessent for treasury secretary has generally been well received by the (financial) markets.  Though a keen supporter of the use of tariffs to rebalance US trade, he is also a strong advocate of prudent fiscal policy.  His decision-making will be key.

 

Kev Bevan, 07368 825877